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Since acquiring Meridien Research about 10 months ago, IDC provides strategic technology advice to both buyers and sellers of technology in the financial services space. We spoke with James Sharp, research director for Financial Insights Canada, an IDC company.

IT Focus: A presentation you gave earlier this year at SAS cited customer-related priorities as the top business driver as financial institutions look to IT. Are you still seeing retaining existing customers, acquiring new customers, reducing costs, developing products, developing new services, STP and CRM as the top priorities and in that order?

James Sharp: On a macro level basis, all of those drivers still hold in a broad sense, but there is some wiggle between some particular lines of business within the broader financial services patch. For example, retaining existing customers – if you’re a property and casualty insurer, that’s not true. The P&C business is looking at eliminating risk through business intelligence and actually mining out non-profitable customers. The life insurance patch is much more interested in new product and new service development. The big driver in life insurance is the expansion into the individual wealth management platforms.

So, as a function of some of the deregulation going on in the Canadian market, some outfall of Bill C48…there’s a big push from life insurers in terms of speed to market to build up some of these wealth management platforms. In the P&C patch it’s mostly around a thirst for profitability. There is still a lot of focus in the P&C patch around claims processing. That is seen as one of the areas in which there is the opportunity to improve profitability.

If I was to look at the broader banking environment, I would say customer retention, new customer acquisition, cost reduction – these are some of the top drivers for sure. Depending on which portion of banking you’re looking at, these all manifest slightly differently. If I was to take a look at channel and distribution transformation as a driver, there is a big push for branch renewal. Firms like TD or Royal Bank are overhauling their legacy OS/2 platforms. That means new apps in the branches, new operating system, new branch platform. There’s still a lot going on around channel integration.

IT Focus: Channel integration has topped the list of challenges for FIs for the past five or six years. Why is it still a problem?

Sharp: You need to think about this from two perspectives. First axis is around product complexity and the second is the structure of the distribution channels. Due to specialization and a deconstruction of the financial services supply chain, you’ve got more customized and more specialized products being taken to market as these financial services firms try to fight off what I will call broadly commoditization of the financial services instruments.

As an example, CIBC distributes basically retail banking services and provides a wholesale banking platform to President’s Choice called Amicus. Then President’s Choice, i.e. Loblaws, becomes the retail distribution outlet. So there is a fundamental change in actually the distribution channel itself. Dealing with that and integrating that is a challenge for these firms.

Over top of that, you’ve got more complex services and products being offered. So the problem isn’t going away because the distribution challenge is getting tougher and complexity of the products and services over those channels is getting tougher. It isn’t because there isn’t work effort being done on this. CIBC is now dealing with 600 or 700 different flavours and incarnations of mortgages over a much more complex distribution system including online and offline distribution mechanisms.

One of the areas you’ll see a lot of focus and specifically in the capital markets space would be around the thirst for operational efficiency; basically, lower cost of operating and infrastructure improvement. You see a lot of stuff around the Basel II Capital Accord, so strategies for mitigating operational risk out of your organization.

IT Focus: What do you see as most promising among the existing IT tools or solutions being applied to address these priorities?

Sharp: We’re seeing a lot of drivers around outsourcing. Outsourcing and operational support is the only double digit growth area in the Canadian IT market. That is also true in the financial services slice of that.

Business intelligence and data warehousing is definitely still seen as key. You want a holistic understanding of how your organization deals with a particular client. Ideally a firm needs to track its touch points with all of its clientele. A colleague of mine was at his banking institution and his bank didn’t know that he had a mortgage with them! When he had his mortgage funded, he was living in B.C.

Number one, you need to be able to trap the information so you have this holistic perspective.

The second thing is this notion going around that there are no unprofitable customers, there are just unprofitable business models. Once you understand the holistic value this client has, then you can start tweaking your business models against the business intelligence you have.

IT Focus: You have indicated that FIs cited business intelligence and data warehousing as a leading IT challenge. Vendors cite them as solutions. Is there a gap in perception here and, if so, how can it be eliminated?

Sharp: I don’t mean to downplay any IT vendor that is my client or potentially could be, but IT vendors sell bullets to guys fighting wars. They provide a tool, not solutions to business problems. Business intelligence and data warehousing are a means to an end.

The National Australia bank…in May 2001…did predictive sales lead generation. They defined a whole bunch of triggers for a whole bunch of events for coming back in terms of behaviours and things that they would expect to see out of their distribution channel. Each time they see one of these events, they would generate an action item out of this. They kind of had a hub and spoke mechanism. They would fire X number of leads to the closest branch where this lead was generated from. They basically pulled all these events and alerts and triggers into a central data repository powered by Teradata. They generated 570,000 new leads in the first half of their year which generated (Australian) $4.4 billion of new loans. They generated 2000 leads per day and exceeded their business plan by three times.

What is the value of BI and data warehousing? It gives you the visibility. What you then do with that visibility is the next half of the equation.

IT Focus: Is there any technology that you see as key?

Sharp: For channel integration or process re-engineering where you need to move data more fluidly through your organization, a lot of the firms are very interested in using XML as a tagging mechanism. It separates the semantics from the data so it is easier to get to the “nirvana” of straight-through processing.

Whether it is claims processing insurance, trade equity order settlement in capital markets, credit authorization or loan approval or account open in traditional branch bank banking, everybody is looking to contract processes to make them move more fluidly. Using XML as a tagging mechanism as a way of restructuring that data is core. I would say that one of the places where I would see one of the most robust adoptions of this is the insurance industry. The P&C industry is pretty hell-bent to adopt an XML tagging scheme called ACORD (Association for Cooperative Operations Research and Development). It deals with semantics specific to the P&C insurance industry.

You see it in other places as well. Branch transformation. TD branch transformation is moving from OS/2 to the Microsoft .NET platform. Web services and XML are a key portion of that platform. XML is getting more and more traction with every passing day in the financial services space.

A smarter phone system doesn’t improve customer service. Things like IVR, ACD, screen pops, CTI, intelligent call routing within a contact centre will improve customer service. If you want to improve customer service, improving your ability to deal with inbound and outbound email is definitely a challenge and seems to be a sore point.

One of the key things in improving customer retention and customer acquisition is basically retasking and retraining the people working in branches to be relationship based as opposed to transactional based. The trite term for that is you need to turn your tellers into sellers. That’s one of the major drivers behind the branch transformation initiatives: to put the tools, the skill sets, the rich multi-media content that’s going to transform this workforce or transaction into a relationship base, given the tools and the platforms they need to become cross-sellers as opposed to transactional sellers. That’s a key part of the play that large diversified financial firms are looking at.